This case analysis is done by RAJA KUMAR B.A.LL. B (5th SEM) from CUSB.
Table of Contents
1. Analysis of Fact
The United India life insurance Company Ltd. -known because the ‘Company’ incorporated under the Indian Companies Act, 1882, with the principal object of carrying on life insurance business altogether its branches was registered as an insurer under the life insurance Act, VI of 1938 for carrying on life insurance business in India. The said Company had an unprecedented general meeting where a resolution was passed, among other matters, to sanction a donation of rupees 2,00,000 from out of the share. Life insurance Corporation Act came into force on 1st July 1956 where one among the provisions was associated with appointing all the assets and liabilities associated with the control of the business of insurance vested within the life insurance corporation. The life insurance Corporation Act gives power to the corporation by Section 51(a) to use to the tribunal to sort relief in respect of payments made by the insurers, not necessary for controlled business which was done during the five years preceding the date of vesting the powers. Their food corporation applied to the tribunal for relief concerning the matters of payment of rupees 2,00,000 by the company to the appellant on the idea that the payment was ultra vires the facility which was given to the company, and it had been not reason enough for controlled business. The tribunal, therefore, ordered the appellants to urge back the sum of rupees 2,00,000 to the corporation. As a result, a special leave application was filed to the Supreme Court to appeal this matter decided within the tribunal.
2. Analysis of Legal Provisions associated with the case;
Section 2 (d) of the Indian Contract Act says as, When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, similar act or abstinence or promise is called a consideration for the promise.
Section 2 (g) of the Indian Contract Act, 1872, An agreement not enforceable by law is said to be void.
Section 2 (4) of the Life Insurance Corporation Act, 1956, addresses “Corporation” which means the Life Insurance Corporation of India established under section 3.
Section 13 of The Life Insurance Corporation Act, 1956, addresses the Duty to deliver possession of property and documents relating thereto. —
(1) Where any property appertaining to the controlled business of an insurer has been transferred to and vested in the Corporation under this Act, also, —
(a) every person, in whose possession, custodianship or control any similar property may be, shall deliver the property to the Corporation forthwith;
(b) any person who, on the appointed day, has in his possession, custodianship or control any books, documents, or other papers relating to similar controlled business shall be liable to regard for the said books, documents, and papers to the Corporation, and shall deliver them to the Corporation or to similar person as the Corporation may direct.
Section 15 (e) of The Life Insurance Corporation Act, 1956, says that the Right of Corporation to seek relief in respect of certain transactions of the insurer, entered into any other sale of such an onerous nature as to beget a loss to or put the liability on, the insurer exceeding any benefit accruing to the insurer.
3. Analysis of the other relevant judicial decisions which are referred in the case;
Ashbury Railway Carriages and Iron Company v. Riche[1], It was said that “The covenant, thus, isn’t simply that every member will observe the conditions upon which the company is established, but that no change shall be made in those conditions; and if there’s the covenant that no change shall be made in the objects for which the company is established, I seize that that includes within it the engagement that no object shall be pursued by the company, or tried to be attained by the company in practice, except an object which is mentioned in the memorandum of association.”
Bacha F. Guzdar v. Commissioner of Income-tax, Bombay[2], It was observed that “The true position of a shareholder is that on buying shares an investor becomes entitled to partake in the gains of the company in which he holds the shares if and when the company declares, subject to the Articles of Association, that the gains or any portion thereof should be distributed by way of tips among the shareholders. He has certainly an additional right to participate in the means of the company which would be left over after winding up but not in the assets as a whole.”
Egyptian Salt & Soda Company v. Port Said Salt Association3 “It was observed that The Memorandum of Association must like any other document be demonstrated according to accepted principles applicable to the interpretation of all legal documents and no rigid canon of construction is to be applied to such a document. Like any other document, it must be read fairly, and its import deduced from a reasonable interpretation of the language which it employs.”
Ashbury Railway Carriages and Iron Company v. Riche[3], observed that “The covenant, therefore, is not merely that every member will observe the conditions upon which the company is established, but that no change shall be made in those conditions; and if there is the covenant that no change shall be made in the objects for which the company is established, I apprehend that includes within it the engagement that no object shall be pursued by the company, or attempted to be attained by the company in practice, except an object which is mentioned in the memorandum of association.”
The Judicial Committee of the Privy Council in Angostura Bitters & Company Ltd. v. Kerr[4], observed: “that except in respect of such matters as must by statute be provided for by the memorandum, is not to be regarded as the dominant document, but is to be read in conjunction with the articles”.
Re. Birkback Permanent Benefit Building Society[5], it was said that, where a Company does an act that is ultra vires, no legal relationship or effect ensues therefrom. Such an act is void and cannot be ratified even if all the shareholders agree.
4. The Judgment
If we talk about the Judicial decision of this case then, it was therefore held that an act of the company is assumed to be ultra vires if it is not:
Required to accomplish the objectives stated in the memorandum.
Significant to attend the objects of the company.
Something the company is entitled to do by the Companies Act in the course of its business.
Where the act of the company is ultra vires, no legal relationship can be given to that effect and that act will be void and cannot be approved even if all the members or shareholders of the company allow it.
The bearers of the company accountable for ultra-wires resolution are themselves competent to make the liability good and make good the amount belonging to the company which was unlawfully separated.
The main purpose of the company is required to be named according to Section 13 of the Company Act 1956 and also specify objects ancillary to the accomplishment of the main article.
It was also held that the memorandum of association of the company must be interpreted impartially, and the analysis of its language must be done just appropriately.
The memorandum of association has to be understood with an article of the association whenever there lies any vagueness in the terms of the contract. This may explain the provisions of the memorandum, but it cannot prolong its scope.
And as per my view, I will for the Judgment of what court has asserted because as Court spelled out that, the company’s funds cannot be redirected to every type of charity even though the company’s memorandum gives power to that result. Furthermore, objects must be characterized by powers. The power to borrow or to make a charity is not an objective. Objects have to be stated in the memorandum. The powers stated can only be used to put into force the purposes of the company. They do not become self-governing objects by themselves.; This case can be held to be good law and an authority on these points of law. The judgment is a[6]lso referred to on other points of law, including personal liability of directors and value of consideration.
5. Critical Analysis
The doctrine of ultra vires restricts corporate action within fixed purposes in the memorandum. While it handicaps the concerned manager, it lays a net for the careless creditor. That is why there have been objections against this concept ever since its formulation. The businessman has always attempted to avoid the restrictions imposed by the doctrine on their choice of action. A method of circumventing ultra vires is the usage of registering memoranda bearing a lavishness of purposes and controls.
For example, in Cotman v Brougham7, the House of Lords had to consider a memorandum that has an objects clause with thirty sub-clauses enabling the company to carry on almost every understandable type of business which it can use. This type of object clause beats the very idea for which it is there. To prevent this from occurring the courts formed the rule of the main object” of construction. The rule has its origin in the decision of Ashbury case[7] where the court declared that the words “general contractors” must be read in connection with the company’s main business[8].
CONCLUSION
It is apparent from the above case analysis that the doctrine of ultra vires plays an important in the companies and the conclusions are as follows: –
The doctrine of ultra vires is void and cannot be approved by the directors or the company itself. Also, this act cannot be made intra vires by way of ratification and estoppel. The doctrine applies to all the companies that have a separate legal existence and are consolidated under the companies act.
REFERENCES
- Ashish Agarwal, Doctrine of Ultra Vires under Company Law, Available at, https://thecompany.ninja/doctrine-of-ultra-vires-under-company-law/#Conclusion_-
_Reformation_Brought_to_the_Doctrine_of_Ultra_Vires, Last visited on 04/10/2021
- Diganth Raj Sehgal, Analysis of Dr. A. Lakshmanaswami Mudaliar v. Life Insurance Corporation of India, Available at, https://blog.ipleaders.in/analysis-drlakshmanaswami-mudaliar-v-life-insurance-corporation-india/#Judgement, Last visited on 30/09/2021)
- Shipra Sayal, Doctrine of Ultra Vires, Available at https://lawtimesjournal.in/doctrineof-ultra-vires/, Last visited on 30/09/2021
- SCOPE APPLICATION AND CONSEQUENCES OF THE DOCTRINE OF ULTRA
VIRES, Available at
Last visited on 03/09/2021)
- https://indiankanoon.org/doc/1682214/
- https://www.manupatrafast.com/?t=desktop
- https://www.scconline.com/?gclid=CjwKCAjwtfqKBhBoEiwAZuesiF6sg5ze3Dm_X xmZxBG_KmQG4E4oY9SQ1r9oSLdKlQYU9P8adL2GYhoCO7wQAvD_BwE
- https://www.coursehero.com/file/pjkho6/Lakshmana-swami-Mudaliar-v-Life-
Insurance-Corporation-Of-India-3-Even-in-India/
[1] I.L.R. (1875) H.L. 653.
[2] MANU/SC/0072/1954: [1955]27ITR1(SC) 3 [1931] A.C. 677.
[3] I.L.R. (1875) H.L. 653
[4] [1933] A.C. 550
[5] [1912] 2 Ch. 183
[6] AC 514: (1918-19) All ER Rep 265.
[7] I.L.R. (1875) H.L. 653.
[8] Available at https://www.studocu.com/in/document/national-university-of-advanced-legalstudies/law/lakshmanaswami-mudaliar-v-lic/10531121, Last visited on 03/10/2021.